20 Year Investment as envisaged in 2013

Maybe this post should be on my notebook as a mind-map instead of a post.

I have been trying to replay the scenario in my mind over and over, at-least few thousand times in the past 1-2 months as to what should be one’s biggest financial investment, all debt free and leaders for over 25 years in their region.

Based on adjusted population I feel the maximum potential to expand is with GSK Bangladesh followed by Akzo Nobel Pakistan. Chances of lowest loss are with Unilever Nepal and GSK Bangladesh.

Many random probabilities run through the mind making final choice harder. Bangladesh has a precarious balance with sea level but 2.5% of worlds population offering a global 130 Billion USD company at 800 Crores INR. This is cheap on global average by about 31 times. Seemingly cheap Unilever Nepal is only 7 times undervalued. If Bangladesh merely reaches mid point/average of world price appreciation can be 31 fold over next 20 years. Nepal has no such issues with rising sea level snowballed by global warming but is home to only 0.5% of worlds population. (Am I the the brutal Capitalist silently praying for increased fertility rate ?)

Some companies may quite look expensive at 45 times earnings but need not necessarily be. eg: RECKITT BENCKISER Bangladesh is undervalued on population adjusted metric by 30 times as well. I believe it to have greater latent potential but not much growth as yet . I prefer consumer brands to prescription pharma – natural tendency to consume for a life time vs fickleness of regulator and lawsuits. GSK has made it clear that it would operate only 6-7 large brands whereas RECKITT is building more muscle in consumer category with 19 power brands. Interesting interview http://businesstoday.intoday.in/story/reckitt-benckiser-global-ceo-rakesh-kapoor-interview/1/191047.html

RECKITT is actually growing much rapidly in rest of the world relative to GSK but Bangladesh is not yet its focus. ==============================================================

Number of times undervalued is only one part of the equation. Others are:

Royalty (In India Unilever extracts profit in two ways, by dividend and royalty, not so in Nepal, all profits are extracted via Dividends !! Hence if you become a co-owner you get Royalty + Dividends in Dividend Payout, hence the 21% NPM of Unilever Nepal more than anywhere else)

Nestle or Agro Tech like food companies do not translate into like for like comparison due to varying foods habits of India vs West.

Tendency of company to acquire smaller companies and build assets Market Cap / Sales (GSK Pharma India 9 times, GSK Consumer India 6 times, GSK Global 4 times, GSK Bangladesh 1.5 times)Then, there are googlies like Press Corp Malawi with a very diversified portfolio but dividend payout ratio is only 10% http://www.presscorp.com/Although Malawi Kawach has depreciated 50% against USD in the last one year,results are astounding

They have tripled this year alone, still available at 10 times earnings. Inflation has reached 20%

Only 11 banks have a licence to operate in Malawi opposed to 100s of them in similar sized countriesNice to have a problem of plenty for a change. Mind yearns for what isn’t yet owned. I want Akzo Nobel just because account has not yet opened in Pakistan. A story comes to mind. Its about a young boy’s interest for an ugly dog belonging to a neighbour. He kept demanding for it despite offers of other pets with better appearance from his parents. Moral in his own words: ’Attachment is blinding. It lends an imaginary halo of attractiveness to the object of desire’

I am not sure Michael. Manufacturing companies have an edge over trading companies IMO, negative for Cravatex, Rs depreciation another negative for import intensive company. Its an insignificant position for me now, holding primarily due to various biases. FILA has failed to take off, poor quality product. WILSON may provide succour. Balance sheet is also weak now, not sure why I am holding on.

I would encourage investing in some of MNCs I mentioned in under developed countries.

Amit, do you have a view on Liberty Shoes? It has show wonderful turnaround in last one year and is growing pretty fast. Also, the stock price recently broke out after 4-5 yrs of consolidation, which obviously is extremely bullish sign.

Known/Institutionally owned market leaders are not going to give you 20 baggers in 4-5 years.. Either small cap market leaders or number two player could compound money. Relaxo 23 times in 5 years. Others that have done the job are also leaders or #2, Symphony, TTK, Cera, Hawkins, Kitex Garments, Mayur Uniquoters. All the money in most industries is made by top 2 players (GE followed it to heart), in some industries everyone makes money (Housing Finance), in some nobody makes money or hardly anyone (commodity industry)

So, I am following the principle of owning the leader myself, I couldn't recommend anyone to own #4 player. Footwear is very interesting because after 40 years of investing prowess Buffett lost 2.3 billion on Dexter Shoes

My focus has changed to buy only leaders, as they are available at reasonable price, if not in India then elsewhere. Market cap / Sales does work, Relaxo was 0.2 times market cap / sales in 2008, just as Superhouse was 0.1 times when I mentioned, even now after doubling it is 0.2 times.

I am a NRI and have been out of India since I was 17 living in the States and Singapore. I am a full time investor.

As I study the Indian market for investments what confounds me is that local brands such as Relaxo and even licensees of mediocre brands such as Jockey (Page Industries) are making mind boggling profits simply not possible anywhere in the world. This in my view is mainly due to the still closed nature of the Indian economy.

What will happen when International brands come in full steam like they have in SE Asian countries. Can Relaxo compete with hush puppies, Haviannas and scores of much better international brands? Can VIP suitcases compete with Samsonite, Delsey, Tumi etc?

As long term investors would we not be making the mistake of investing in these local ” market leaders” as the world is getting more global and trade barriers come off?

No significant western company make air coolers, so second was safer bet.

Per Capital Income in India is quite low, 1000 $ per capita vs 35 – 50,000 $, so the comparison is chalk and cheese. Jewellery is also another example with no foreign competition to local companies, same for hair oil, pressure cookers etc.

I am skeptical of buying anything generally that western companies with great corporate governance can also make but there are few exceptions. Many large MNCs are not serious about India, so there is a lot of room. All said and done in about a few years, maybe 5-10, it will not be possible to make over 10-12% cagr in stocks in India. There will be way too much capital and competition.

============================================Time for few examples. Singer in India is 100 Crores market cap but is 10 times bigger in Pakistan, Bangladesh and Sri Lanka, so effectively 70-100 times bigger is adjusted for population. That is bewildering, isn't it !

There are many markets in India, so there is room. BUT its harder to win with them and spot them, OK to own as part of 40 stock portfolio, so a few casualties in stride, on still does fine. My inclination is to own no more than 10 – 12 stocks hence preference to own a company that is leader in 100 countries.——————————————————————

Check that Brands of Reckitt Benckiser, a 50 Billion USD FMCG company, its not cheap, about 30 times earnings in Bangladesh, in my opinion potential to grow 30-50 times, but management is not yet serious in bangladesh. Glaxo BD is a steal, growing at 30% cage for 10 years, yet at 20 times earnings.

Thanks Amit, I am with you on choosing sectors with limited potential foreign competition that is why despite the fantastic track record of Page Industries, I am a bit hesitant to dive in at today's nose bleed valuations. Think Mahindr and Mahindra with strong dominance in tractors could be a long term winner. Deere the world leader is already in India but won't be able to outcompete Mahindra on price or dealer network.

You seem to be really into frontier market investing, was wondering whether it would be easy to open a Bangladesh trading account with a Singapore passport, would you know of any brokerage?

Also, not sure what your return expectations are but global leaders such as Nike, Visa, Inditex, Richemont etc deliver good long term risk adjusted returns.

Page is quite interesting, I did own and sell it. Does 3000 Crores INR turnover in the world but 1000 Crores in India. India's GDP accounts for 2% of Gross World Product (GWP) yet 33% for Jockey International, its an anomaly.

Its very easy to invest in Bangladesh and Srilanka, hard in Pakistan and Nepal.

BRAC is quite big and so is Lanka Bangla, both are about 1500 Crores in size and 100 crores in profits. You can also have custodian account with HSBC or Citibank if you don't trust local companies, to keep Demat copy of your shares and money. I am invested through Lanka Bangla and Combank of Ceylon. If you don't get a reply in few days, let me know. Whole process can take a month, but worth it.

Fonterra is legendary and invincible pretty much like New Zealand, not militarily but food, flora, rain and agricultural security. We're only 4 million people in NZ with 110 Billion$ GDP, Fonterra is worth 10 Billion NZ$ with 20 Billion NZ$ revenues.

NZ is 0.06% of world population, yet Fonterra accounts for 30% of world's Milk Exports. They're building dairy farms in China as well. Never studied seriously, but with generations of experience, can't go wrong with this company.

In regards to growth rates of companies one of my learnings has been to look at it in the context of the market size, that explains why Visa continues to grow despite its size, more than 80% of Asia still uses cash transactions not to speak of Africa, Eastern Europe etc. so plenty of growth ahead, the only risk is lawsuits given the oligopolistic nature of the industry

I have bought INDIABULLS Finance shares in Dec 2012 around 300rs in large quantity and have been holding them till date. Over these last 5 quarters company has seen tremendous improvement in its balance sheet and has churned out very good dividends without compromising on its Growth. It is still projected to grow above 20% for the next two years. Despite all the above factors its share price is languishing at mere 230 rs which is 5 times FY14E earnings.

Whereas Dewan housing finance has seen a lot of re-rating offlate ( though it is still available 5-6 times FY14E ). May be due to the fact that its growing at higher pace and also because of the entry of RAKESH Junjunwala. Technically now it is in free zone.

My question to you is .. how should i face this market's weird behavior. Should i keep holding on to my conviction buy Indiabulls and wait for the sectoral headwinds to improve ? or should i shift to Dewan housing which is in same sector at similar PE but less P/BV and technically in free zone ? Or should i shift my holding partially into Dewan and hold both of them in my portfolio ?

Market is treating JK and Ceat also very differently. some times its very difficult to understand.

Hi Mads, you generally need to give 3-4 years for investment to work out unless the company has stopped growing altogether. 20-30% of stocks will be unpredictable, so diversification takes care of that. I am buying all housing finance companies Dewan, Canfin, Indiabulls, Gruh, even outside India, I don't see why one should super outperform the other. they should do 18-25%, all of them and I am not worried about extracting the last penny out.

Agree that they should grow at similar pace but returns in the longer run will definitely vary given the fact that GRUH is trading at 25-26 times FY14E where as INDIABULLS at 5 FY14E. Another important factor is its ROE is higher at 25% to Dewan which is at 17.

Muree Brewery which started 2013 at 100 Rs was found by me in November 2013. I mentioned it on 29th of November 2013 (price at the time 300 Rs), is up another 250% past 2 months (CMP 850 Rs) http://dps.kse.com.pk/

Generally people used to talk about selling a stock to sleeping point. My goal is to invest for 4-5 years in a couple of opportunities only. Philosophy should be instead, “a great stock is one you can't sleep without owning it”. Those kind of opportunities do not come frequently. Have not invested more in India this year. Continue to accumulate MNCs in neighbouring countries in 2014.

Methinks both were languishing because of the market's perception about the the promoter group. I think the Wadhawan's of Dewan Housing finally overcame this simply because of Rakesh Jhunjhunwalla's entry. Till then, they were unable to de-link from their cousins, the Wadhawans of HDIL.

My priorities have changed and I do not like to have a diversified portfolio of small caps, even though returns will be much greater in them. Focus is to be content with earning 20-25% cagr for decades. Above two names do not fit well. Photoquip is not a leader in LED, only in Studio lighting.

Reckitt, Unilever, GSK, Akzo Nobel and few others in developing countries have 90%+ probability of returning 20% cagr for decades. Expecting mega-multi baggers from them and do not recommend investing in microcaps more than 1% of portfolio

Also my focus and heart is not into investing full time nor will it ever be, hence do not have time to invest in research in small caps. If I can earn 20% cagr by investing 20 minutes a day into financial matters as opposed to 30% cagr by investing 8 hours a day I prefer former.

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Amit Arora

B.Com(Hons) Gold Medalist - Delhi University, MBA.

Served United Nations between 2001-2006 in Europe.

Since 2007 consultant for Inland Revenue, Ministry of Economic Development, Ministry of Social Development, Ministry of Justice, Ministry of Business Innovation and Employment (NZ Govt. Organisations).